Mezzanine Finance: Overview

Copyright © 2013 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved. This is just one example of the many online resources Practical Law Company offers. To access this resource and others, visit practicallaw.com. Mezzanine investment opportunities are likely to increase in both frequency and transaction size as private equity sponsors, especially in the middle market, raise financing for acquisitions (for an overview of financing an acquisition by debt, see Practice Note, Acquisition Finance: Overview (www. practicallaw.com/1-382-8186)). Mezzanine funds can offer terms in a buyout context with an expediency and certainty of execution that is difficult for investment banks to replicate. Mezzanine financing can provide leverage beyond that available under a credit facility in middle market leveraged buyouts where the amount of desired incremental debt is not large enough to attract the high-yield market. As hundreds of billions of dollars of debt raised before the financial crisis to finance leveraged buyouts begins to mature, companies will have a significant need to refinance it, likely generating greater demand for capital and creating situations where mezzanine funds could play an important role. When the credit environment experiences periodic disruptions, mezzanine investors could again find themselves as one of the limited sources of capital available, with an increasing number of attractive deals in which to invest. Against this background, this note examines the use of US mezzanine financings as a capital raising tool for corporate acquisitions and financings (including recapitalizations). It focuses on: Typical terms of mezzanine investments. Primary documentation. Key issues that arise in mezzanine financing transactions. For information on mezzanine financings in Europe, see Box, European Mezzanine Capital. Mezzanine capital typically refers to a tier in a company's capital structure between debt and equity, just as a mezzanine in architecture is an intermediate floor between two different floors of a building (see Box, What is Mezzanine Capital?). For many years mezzanine investing was primarily a source of funding in a few select areas, such as real estate (see Box, Real Estate Mezzanine Capital) and growth capital transactions (see Practice Note, Minority Investments: Overview (www.practicallaw.com/1- 422-1158)). The dislocation in the credit markets and the scarcity of capital in 2008 and early 2009, however, led to the increased prominence of mezzanine investing for a broader array of transactions, including a significant percentage of the few leveraged buyouts that closed during that time (for an overview of a leveraged buyout transaction, see Practice Note, Buyouts: Overview (www. practicallaw.com/4-381-1368)). The increased visibility of mezzanine financing during the financial crisis in turn generated additional interest on the fundraising side. A number of financial institutions entered the mezzanine lending space or raised additional capital for existing mezzanine funds. As the dislocation of the credit markets has receded, non- investment grade issuers have again become able to raise capital by selling both secured and unsecured debt securities in the high-yield market. Nevertheless, even though mezzanine funds compete to a certain degree with the high-yield market as a source of capital for acquisitions and recapitalizations, the outlook for mezzanine finance remains strong, especially during periods of recent market volatility: Mezzanine investors continue to invest capital in issuers with growth prospects. Learn more about Practical Law Company | practicallaw.com Mezzanine Finance: Overview Arthur D. Robinson, Igor Fert and Daniel N. Webb, Simpson Thacher & Bartlett LLP This Practice Note reviews the typical terms, primary documentation and key issues that arise in mezzanine financings.

Mezzanine Finance: Overview

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